William Nordhaus

David Warsh: A way to change tech giants' behavior?

Google headquarters, in Mountain View, California

Google headquarters, in Mountain View, California


“What is so rare as a day in June,’’ as New England poet James Russell Lowell wrote, or, for that matter, in May, in Somerville, Massachusetts? A genuinely powerful intellect, that’s what. Enough to elicit a weekly instead of a walk.

The most interesting thing I saw last week was A Tax to Fix Big Tech, an op-ed by economist Paul Romer in The New York Times, proposing a progressive tax on corporate revenues from sales of search advertising. “Putting a levy on targeted ad revenue would give Facebook and Google a real incentive to change their dangerous business models,” he wrote.

About those dangerous business models, Romer had little to say except that

It is the job of government to prevent a tragedy of the commons. That includes the commons of shared values and norms on which democracy depends. The dominant digital platform companies, including Facebook and Google, make their profits using business models that erode this commons. They have created a haven for dangerous misinformation and hate speech that has undermined trust in democratic institutions. And it is troubling when so much information is controlled by so few companies.

What is the best way to protect and restore this public commons? Most of the proposals to change platform companies rely on either antitrust law or regulatory action. I propose a different solution. Instead of banning the current business model – in which platform companies harvest user information to sell targeted digital ads –  new legislation could establish a tax that would encourage platform companies to shift toward a healthier, more traditional model.

He relied for a foil on Sen. Elizabeth Warren’s proposals to break up big tech companies, using antitrust statutes or regulation. He wrote, “Existing antitrust law in the United States addresses mainly the harm from price gouging, not the other kinds of harm caused by these platforms, such as stifling innovation and undermining the institutions of democracy.”  And regulators and judges can be captured by clever lawyers and patient corporate lobbyists.  (Nothing here about the legislators who would enact and monitor the tax statutes and laws.)

There are several advantages to using tax legislation as a strategy, according to Romer. The tax he had in mind could apply to revenue from sales of targeted digital ads, the core businesses of Facebook, Google and other firms that make money monitoring users’ searches. “At the federal level, Congress could add it as a surcharge to the corporate income tax. At the state level, a legislature could adopt it as a type of sales tax on the revenue a company collects for displaying ads to residents of the state.”  Such a tax could be progressive, creating an impediment to growth through acquisition, and an incentive to periodic spin-offs, and thus greater competition. He added several FAQS the next day on his Web site about various tax aspects.

There was, alas, very little speculation about the new ad-free subscription models that might emerge as a means of avoiding taxes on targeted ad revenue, except to say that subscribers would be mindful of the privacy they obtained by avoiding the ever-more sophisticated surveillance of their habits by traditional search services, and subscription companies “could succeed the old-fashioned way: by delivering a service that is worth more than it costs.”

Along with countless others, I share Senator Warren and Nobel-laureate Romer’s sense that Facebook and Google and other big Internet firms have become highly undesirable corporate citizens in their current gigantic and highly profitable ad-supported form. Surely newspapers are among the “institutions of democracy” that would be strengthened by some governmental reshaping of advertising markets.

Those with long memories will recall that, as a professor at Stanford University’s Graduate School of Business, Romer was the government’s expert in the remedy phase of the Justice Department’s successful (to that point) antitrust complaint against Microsoft Corp. His recommendation was to break the company into two competing firms – one selling its Windows operating systems, the other marketing software applications (including its highly profitable Office suite). The remedy was headed for implementation, until an appellate court sent the case back to a different judge. The election of George W. Bush mooted the issue; the Justice Department withdrew its complaint: a salutary victory against big business slipped away.

Romer had left research by then to start an online learning company.  In 2007 he quit Stanford altogether to work as a policy entrepreneur – a natural enough path for the son of a former governor of Colorado who had harbored national ambitions.  Romer spent several years advocating for “charter cities,” tax-favored enterprise zone in developing nations whose governance was to be somehow outsourced to independent authorities. Two attempts failed on the eve of what would have been their creation.  In 2010, he joined New York University’s Stern School of Business as a University Professor and for a time, director of NYU’s Marron Institute of Urban Management.

In October 2016 he signed on as chief economist of the World Bank, with hopes of transforming its large and well-funded research department. Fifteen months later, he resigned, after a series of controversies with staff. By then he had come perilously close to gadfly status as a critic of macroeconomics. He could speak so freely, he explained, “because I am no longer an academic. I am a practitioner, by which I mean that I want to put useful knowledge to work. I care little about whether I ever publish again in leading economics journals or receive any professional honor because neither will be of much help to me in achieving my goals.”

The Nobel award last year, jointly with William Nordhaus, “for integrating technological innovations into long-run macroeconomic analysis,” rescued Romer from that limbo by certifying his stature. He married the same day he received the prize.  Since then, Romer has offered advice to incoming Word Bank President David Malpass, in an op-ed in the Financial Times (outsource the bank’s research function and concentrate on infrastructure planning and financial diplomacy instead), and, last week, the op-ed in the Times

Op-eds are only slightly better than TED talks.  But, as noted, really good ideas are rare. This one may be profound.  It deserves plenty of further study.

David Warsh, an economic historian and veteran columnist, is proprietor of Somerville-based economicprincipals.com, where this column first ran.

David Warsh: On the failure of markets

Note Independence near the border with Kansas.

Note Independence near the border with Kansas.

As especially interesting place to visit is Independence, Mo., 250 miles up the Missouri River from the Mississippi.  It was nothing more than a river bank in 1804, when the Lewis and Clark expedition stopped overnight to pick wild plums, apples and raspberries.  Mormons began to settle in the little frontier town in 1831, and by 1840, you could stand by the gate of the marshalling yard and contemplate the junction of all three main wagon routes to the west: the Oregon Trail, the California Trail and the Santa Fe Trail.

Something of the sort may have been in the back of the minds of the Nobel Committee when they designated William Nordhaus and Paul Romer recipients of the 2018 Swedish Central Bank Prize for Economic Sciences in Memory of Alfred Nobel. By unexpectedly linking the two, each of whom could have been cited separately, the Scandinavians got people thinking and writing about subjects not yet well-connected in the popular mind. Nordhaus is an environmental economist. Romer is a theorist of economic growth.

The link that the prize awarders emphasized was the researchers’ shared concern with the failure of markets to deliver desired results. These are known as externalities, the effect that certain kinds of transactions have on persons who were not involved in the deal. These so-called “market failures” may be negative, as with greenhouse-gas emissions that adversely affect the global climate, or they may be positive, as with the knowledge spillovers that occur when technological know-how is widely shared.

Nordhaus has built models with extensive links to physical science models to gauge the social costs of atmospheric pollution. Romer has deepened and broadened the argument for policies in support of education, for the sharing of intellectual property, and for thoughtful zoning. Much the best discussion of the ins and outs of the laureates’ work that I have seen is by Kevin Ryan, a professor at the University of Toronto’s Rotman School of Management.

I wrote about some part of this story many years ago in Knowledge and the Wealth of Nations: A Story of Economic Discovery (Norton, 2006). Over the next couple of months I thought I might scatter half a dozen weeklies updating the story as best I can in light of the 2018 prize. It will be a welcome alternative to hashing over the election news.

The single most important message of the shared work is to show how modern mixed-market economies can cope with the exigencies of continued economic growth without a lot of regulation.  Carbon taxes, on the one hand, government support for long-term research and development of green technologies on the other, can limit the damage to the Earth that is already in train, and, eventually, even roll back some of the enormous quantity of carbon dioxide that pell-mell growth over two centuries has dumped in the atmosphere.

True, the way ahead is more fraught with peril than were those trails to the Pacific Ocean. But humankind’s inventiveness has grown. What is lacking, so far, is cohesion.

David Warsh, an economic historian and veteran columnist, is proprietor of Somerville, Mass.-based economicprincipals.com, where this essay first ran.